Commentary: Start building a defensive portfolio today

It will take “at least a decade from the beginning of the crisis for the world economy to get back to decent shape,” Blanchard said in a recent interview in Europe, according to a Reuters report.

“It’s not yet a lost decade,” Blanchard said, “but it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape.”

No matter what, you can forget about a 2013 quick fix for America’s fiscal-cliff disaster. Won’t happen.

Slow growth will dominate most of the rest of this decade.

That pounding hangover will still be with us during the 2016 elections, echoing GMO’s Jeremy Grantham’s “Seven Lean Years” forecast “that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years.”

The IMF economist surveys developed and developing nations, our fiscal cliffs plus world problems across the euro zone, China, Japan and more and it adds up to a slow global economic recovery. But while many nations are already working on debt-crisis resolutions, critics fear extreme austerity policies at this time could deepen problems.

As Blanchard put it, again according to Reuters, debt reductions are “unavoidable, but it should be done without stifling growth, walking on a narrow middle path.”

“If you do it too slow, the market thinks you’re not serious, if you do it too fast, you kill the economy. For each country you have to find the right path of consolidation,” said the IMF’s chief economist. “You can have an economy in which inflation is stable and low, but ... the financial system accumulates risks.”

13 best bets for investing in a bear market world: 2013-2018

A question you hear often is: What would economist Gary Shilling and his partner Fred T. Rossi recommend? Why? Because they are straight-shooting, unbiased, research-oriented contrarians who aren’t caught up in the news-of-the-day hoopla. Shilling’s Insight newsletters are essential reading. He’s been a respected Forbes columnist for a few decades. He focuses on the long-term macro issues.

And, like Blanchard, he has been warning us that “much of the excesses and financial leverage built up in past decades, especially in the financial sector globally and among U.S consumers, remain to be worked off.”

Why? The Fed and Treasury’s failed “attempts to bail out the nearly collapsing U.S. private sector” just made matters worse by focusing on bank bailouts rather than jobs. What’s ahead? “Slow global growth in future years.” Not just a temporary, bear-recession dip. But a “deeper depression-style slow-growth likely till the election of 2020.”

Shilling sees beyond today’s lingering hangover of the 2008 banking meltdown, the election wake-up call to corporate CEOs and conservative politicians still demanding deep austerity cuts to solve the debt crisis, and the looming fiscal cliff. Looking years ahead, he warns of ongoing troubles through 2020 as the recovery inches slowly ahead.

He holds steady with his investment recommendations and says the “election does not change our outlook or the ongoing deleveraging taking place.”

So if you a rational investor planning ahead to 2013 and beyond, consider these recommendations. First, six favorable “buy” targets. Then Shilling/Rossi’s seven unfavorable “sell or short” investment themes:

1. North American energy boom

Shilling says Americans “like conventional energy investments including natural gas, on- and offshore drilling and Canadian oil sands ... natural-gas prices appear to have bottomed ... pipelines are attractive ... new nuclear facilities may be postponed in the wake of the earthquake and tsunami in Japan ... renewable energy is problematic since it depends heavily on unpredictable government subsidies. ... Ethanol suffers from drought-sired corn price leaps.”

The idea of a domestic energy boom was reinforced recently when the International Energy Agency published its annual World Energy Outlook: New fracking technologies mean “oil output is poised to surpass Saudi Arabia’s in the next decade, making the world’s biggest fuel consumer almost self-reliant and putting it on track to become a net exporter.” Environmentalists and municipalities impacted by fracking will likely test this macroeconomic forecast.

2. Income-producing securities

“Many investors favor income over problematic capital gains,” including “utilities, drugs and telecoms with high, safe and rising dividends.” Nevertheless, all stocks are vulnerable to a bear market. He also likes investment-grade corporate and municipal bonds.

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